U.S. Energy Sec'y Pressures OPEC

By Brian Dakss

Updated on: May 22, 2004 / 7:57 PM
/ CBS/AP

OPEC is "deeply concerned" about the recent rise in oil prices but has deferred making a decision on increasing its output target until its members meet next month, the group's president said Saturday.

Under intense pressure to pump more oil to help reduce crude prices, representatives of the Organization of Petroleum Exporting Countries discussed a Saudi proposal for an increase of 8.5 percent, or 2 million barrels, in the group's daily production target. But Saturday's talks in Amsterdam were informal, and the group won't decide whether to follow the Saudi lead until its members gather for a formal session on June 3 in Beirut, OPEC president Purnomo Yusgiantoro told a news conference.

"We are deeply concerned about the continuing rise of oil prices in recent weeks," Purnomo said after the talks at a downtown hotel. At least nine of OPEC's 11 members arrived to discuss the proposal ahead of a three-day conference of energy producing and consuming nations that opened Saturday in Amsterdam.

In New York City, finance ministers from the leading industrial countries were meeting this weekend to discuss the need for increased global oil production to combat the recent sharp rise in oil prices. It was not clear whether the officials from the Group of Eight countries would appeal to OPEC to spur supplies. The meeting was being held to prepare the economic portion of the agenda for next month's G-8 summit in Sea Island, Georgia.

In Amsterdam, U.S. Energy Secretary Spencer Abraham said later there was a clear imbalance in the supply and demand for crude, and he called for "strong action" from OPEC to force prices lower.

"I do believe it is a positive sign that a number of OPEC members are expressing the view that higher prices are undesirable and can undermine world economic growth. I think it's also a positive sigh that OPEC appears to be seriously discussing increasing quotas and production and bringing prices down," Abraham told a news conference.

"Now the question is what action will follow."

Separately, with the start of the summer driving season approaching and gasoline prices soaring, Democratic presidential candidate John Kerry said Saturday the United States should strive for energy independence. In the weekly Democratic radio address, Kerry outlined steps he would take in that direction if elected.

But, reports CBS News Correspondent Randall Pinkston, analysts say the damage is already done, no matter what Saudi Arabia and OPEC do now."Already," says Center for Global Studies Chief Economist Leo Drollas, "inflation is creeping up and world GDP is going to suffer at some stage or another because of these high prices."

Purnomo said the OPEC talks were an opportunity for its members to exchange views on "the burning issue of high oil prices" and were aimed at bringing crude prices to "acceptable levels." However, he refused to say how much support there was within OPEC for an increase in its production ceiling.

Purnomo blamed the current high oil prices on several factors unrelated to OPEC or crude supplies: bottlenecks in the production of gasoline, geopolitical tensions, an unexpected strength in demand and heavy speculation on futures markets.

Analysts say an unforeseen burst in global demand has stretched crude supplies, and concerns about security problems in the oil-rich Middle East have contributed to market turmoil. Crude prices have soared above US$40 a barrel as a result, and OPEC, which decided only in March to cut its official output, has come under growing pressure from the United States and other consuming nations to boost production.

Abraham said he made this case Saturday with Saudi Oil Minister Ali Naimi and planned to do so again. Purnomo said he expected to hear from Abraham on Sunday.

OPEC supplies about a third of the world's oil. It has a daily output target of 23.5 million barrels, but Purnomo said the group's members, excluding Iraq, are already pumping 2.3 million barrels above that level. Given this amount of overproduction, analysts have questioned whether an increase in OPEC's ceiling would translate into many additional barrels of crude hitting the market.

Most OPEC members are pumping as much oil as they can, and Saudi Arabia is the only member with significant untapped production capacity. The Saudi Oil Ministry said in a statement that it had already pledged to increase its actual production to around 9 million barrels a day as of June 1. The Saudi government is believed to be producing now between 8.4 million and 8.6 million barrels a day.

Iraq has the second largest proven crude reserves after Saudi Arabia, but sabotage and inadequate infrastructure after years of sanctions have impeded output.

Claude Mandil, head of the International Energy Agency - the watchdog for rich oil-importing nations, called this pledged increase in Saudi output a good first step.

"Will it be enough? That remains to be seen. We'll have to see how the market reacts," he told reporters.

The price of light crude for July delivery on the New York Mercantile Exchange dropped as low as US$39.65 per barrel, before settling at US$39.93, a decline of 87 cents. Since hitting an all-time high of US$41.85 on Monday, U.S. crude has fallen nearly US$2, or 5 percent, amid rising expectations that OPEC would raise production.

In London, North Sea Brent crude settled at US$36.51, down 75 cents on the International Petroleum Exchange.

Although high prices are a bonanza for OPEC in the short term, the group worries that they could hurt long-term demand for oil as energy consumers seek alternatives to crude. Costlier oil also makes it more attractive for non-OPEC producers such as Russia and Mexico to pump more crude of their own, creating the risk of a supply glut and possible crash in oil prices.